Strategy & Chicago Fed National Activity Index

Each month, The Chicago Federal Reserve presents an index of 85 economic indicators
which can be very helpful in diagnosing economic growth momentum and inflation potential.
The 3 month average of the indicator is compared against a longer run measure of real
economic growth. Statistically, monthly data is detrended and shown as an oscillator around
the longer run measure. CFNAI

The recovery cycle has been weak because the index has had trouble staying above the trend
line. Moreover, moves in the index above trend have followed after QE programs from the Fed.
Note how close the economy came to dipping into recession in 2012 before the Fed came to the
rescue with QE3 and notice the struggle the index has experienced staying above trend in 2013
reflecting fiscal austerity measures on both taxes and spending. The combination of QE 3 and
slow economic progress has triggered excess liquidity which market players have poured into
the stock market to ramp up the p/e ratio on faint progress in earnings.

There have been upward flutters of cyclical inflation, but the index has yet to approach the
levels of strength typical of a period when more sustained inflation pressure can develop.
The inflation situation has been very tame in recent years because  modest economic growth
momentum has not taxed a global supply base which grew sharply over the 2004 - 2012
period. with an economic supply / demand balance favorable to lower inflation, commodities
including fuels as well as PMs like gold and silver have fared poorly compared to equities.

Now, looking out to 2014, it would seem that with the liquidity support under the economy
and likely less fiscal stress, depressed asset categories such as commodities and PMs ought
to do better relative to stocks as economic expansion could be strong enough to push up
operating rates enough to generate more positive interest in these depressed groups. If QE 3
without the countervailing fiscal stress is worth its salt, the CFNAI should be able to hit
readings of +0.4 - +0.6 for several months as 2014 rolls along.

Interest in run of the mill inflation hedge plays such as oil, gold and commodities as a class
has been insufficient to turn the tide this year as economic demand vs. supply has yet to
firm up enough to move the needles positively.